What I learned Losing A million Dollars

Have you ever heard someone to saying “I love to lose”? Of course, none would say that, we all want to win. But why do we take it so personally when we lose?

Am I a loser if I lost?

The problem lies on how we perceive losses. Ever since childhood our brain has been trained in seeking for winning situations. Why? Often win is associated with success. Of course between James Bond and Auric Goldfinger none wants to be the latter. And this has nothing to do with the fact that Bond is good while Goldfinger is bad. Instead, many of us think in terms of outcome. In other words, we assume that whom which eventually wins (outcome) is also the best, the brightest and the smartest.

The Book

In the book “What I Learned Losing A Million Dollars” Jim Paul, former president of the CME (Chicago Mercantile Exchange) describes his story trough Brendan Moynihan (part of Jim Paul’s team in the 90s). Jim Paul went from master of the universe (He become millionaire by trading commodities) to penniless in less than three months. The lesson learned through this experience are reported and analyzed in the book in a very crude way. Because in a world where we all seek for success few want to hear what failure implies.

The Dynamics of Speculation

Have you ever invested a dime in the Stock Exchange? If not you must be not aware of how it feels to lose money. The Stock Exchange is like a Casino operating no-stop 24/7. When you hold a (leveraged) position, even though markets close, there is always this feeling of danger in your stomach. The future market for example, is a market where things (such as commodities) are exchanged (on paper). And although you buy many contracts (for example of lumber) you don’t own any. The point of all is just speculating on the fact that the price will go either up or down. The problem with futures when a stop-loss (an option that allows the trader to get out of the market when the position hits a predetermined monetary target) is not placed stands in the fact that we don’t know how much many can we lose. In other words, imagine the scenario in which there are two parties. One part bets that the price of the lumber will go up and the other part bets that it will go down. Each part in order to invest has to put down what is called “ a margin.” This margin varies across several types of investments according the leverage and quantity of contracts bought. In the middle there is a clearing-house (an organ that guarantees that the margin are covered). This is a zero sum game. In short, at the end of the day the winner gets it all. When at the end of the day your margin gets swept off by the market the clearing-house will call to have you integrate it, or otherwise the position will be closed. For a trader having margin calls feels almost like a death call. The problematic starts when the trader personalizes the loss.

Difference between Net-Worth and Self-Worth

The most striking quote from “What I Learned Losing A Million Dollars” is “They (people who lose money) tend to equate self-worth with net worth.” But what is the difference between the two? For today’s standards wealth is the parameter trough, which we tend to measure anything. In a world dominated by corporations and where magazines such as Forbes, Fortune, and Bloomberg emphasize wealth over any other objective in life, no wonder we all use it as reference for success and therefore self-worth. Of course wealth is important and of course who became wealthy must have done something right. On the other hand, a wealthy person does not have to be also worthy. Business biographies are plenty of successful egotistic entrepreneurs that if they hadn’t become wealthy most probably would have been diagnosed as psychopaths. Furthermore traders who eventually blow up (psychologically) are those ones who most personalize market losses. In short, they assimilate a market result with a wrong decision. But what is the difference between being right or wrong, and taking a good or bad decision?

Being right versus making a good decision

One very interesting point analyzed in “What I Learned Losing A Million Dollars” is the difference between facts and opinions. Facts are objective things. For example, if it rained you say something like “today it rained” and that is a fact. But if you say, “tomorrow it will rain” this is an opinion since it did not happen yet. If eventually it rains you will say something like, “I was right in predicting that it would have rained.” But being right in this case does not imply that you take better decisions than others. In this context you were just lucky. Many of us have the tendency to determine whether someone took a good decision by looking at the outcome of that decision. On the other hand, although someone may be right in one circumstance it does not imply that this fellow also made a good choice. The paradox is that although the outcome is positive the decision made to attain that outcome may be a bad one.

Elon Musk, a modern hero (or a very lucky fellow)

Take Elon Musk, former PayPal investor. After selling PayPal to eBay for over a billion dollars he cashed over a hundred million dollars (he was the major shareholder). Now most of us would think that a good decision is to take the money and invest just a small amount of it in new ventures to avoid the risk of losing them all. Elon Musk instead, risked all his capital in a new venture called Tesla. Although this venture is now successful there was a time (late 2009) when Musk (and therefore Tesla) literally run out of cash (Elon Musk Personal Finances). Therefore, even though at hindsight Musk was right it does not mean he took a good decision in investing all his money in a business venture. In short he was extremely lucky! But if he was extremely lucky (rather than a good decision-maker) why do we emphasize his success so naively? We do that because of its outcome. In other words if Musk’s Tesla would have failed back in 2009 most probably none today would have spoken about this folk. Quite the opposite, most probably business schools would have treated him as the worst decision maker in the history of entrepreneurship. The humorous fact instead lies in the fact that Elon Musk “successful (bad) decisions” are treated like a business role model. Isn’t this tendency to emphasize bad decisions taken by folks who were eventually right (lucky) a way to incentivize (bad) risk-taking practices that may lead to some successful ventures but also to many more disastrous enterprises?

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Gennaro Cuofano, International MBA. Author of "The Enlightened Accountant," and "The Art of Mentorship."

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